Chapter 11, Problem 1CP

a.

To determine

Prepare the general journal entry of Incorporation PSS.

Explanation of Solution

Journal entry:

Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Accounting rules for Journal entries:

• To record increase balance of account: Debit assets, expenses, losses and credit liabilities, capital, revenue and gains.
• To record decrease balance of account: Credit assets, expenses, losses and debit liabilities, capital, revenue and gains.

Prepare the general journal entry of Incorporation PSS as follows:

Event	Account title and explanation	Debit	Credit
1	Sales Tax Payable	390
	Cash		390
	(To record cash paid to sales tax)
2	Employee Income Tax Payable	1,000
	FICA – Social Security Tax Payable	840
	FICA – Medicare Tax Payable	210
	Unemployment Tax Payable	945
	Cash		2,995
	(To record cash paid to the payroll liabilities)
3a.	Cash (5,000 x $8)	40,000
	Common Stock (5,000 x $5)		25,000
	PIC in Excess of Par CS		15,000
	(To record common stock issued in excess of par value of $8 per share)
3b.	Cash (1,000 x $52)	52,000
	Preferred Stock (1,000 x $50)		50,000
	Paid in capital in excess of par, Preferred stock		2,000
	(To record preferred stock issued in excess of par value of $50 per share)
4	Supplies	500
	Accounts Payable		500
	(To record supplies purchased on accounts)
5	Merchandise Inventory (190 x $310)	58,900
	Cash		58,900
	(To record merchandise inventory purchased on accounts)
6	Allowance for Doubtful Accounts	3,670
	Accounts Receivable		3,670
	(To reverse the write off of Company 's accounts)
7a.	Accounts Receivable	132,300
	Alarm Sales Revenue (210 x $600)		126,000
	Sales Tax Payable (210 x $600 x5%)		6,300
	(To record the sale of alarm system on account plus sales tax)
7b.	Cost of Goods Sold  (1)	64,620
	Merchandise Inventory		64,620
	(To record merchandise inventory transferred to the production)
8	Accounts Receivable – Credit Card	55,680
	Accounts Receivable	67,000
	Credit Card Expense (58,000 x 4%)	2,320
	Monitoring Service Revenue		125,000
	(To record service revenue received on account, and credit cards)
9	Maintenance Expense	75
	Office Supplies Expense	15
	Cash		90
	(To record maintenance and office supplies expense paid in cash)
10	Cash	55,680
	Accounts Receivable – Credit Card		55,680
	(To record cash received from the credit card customers)
11	Sales Tax Payable ($105,000 x 5%)	5,250
	Cash		5,250
	(To record sale tax paid in cash)
12	Cash	198,000
	Accounts Receivable		198,000
	(To record cash received from the credit customers)
13	Salaries Expense	96,000
	Employee Income Tax Payable		10,600
	FICA Tax – Social Security Tax Payable (2)		5,760
	FICA Tax – Medicare Payable (3)		1,440
	Cash		78,200
	(To record salaries expense paid to employees)
14	Dividends (4)	17,500
	Dividends Payable		17,500
	(To record dividends declared to the shareholders)
15	Warranty Payable	1,625
	Cash		1,625
	(To record warranty paid for repairs)
16	Dividends Payable	17,500
	Cash		17,500
	(To record cash dividends paid to shareholders)
17	Advertising Expense	18,500
	Cash		18,500
	(To record advertising expense paid in cash)
18	Utilities Expense	6,100
	Cash		6,100
	(To record utilities expense paid in cash)
19	Payroll Tax Expense (5)	6,600
	Employee Income Tax Payable	9,200
	FICA Tax – Social Security Tax Payable (6)	5,280
	FICA Tax – Medicare Tax Payable (7)	1,320
	Cash		22,400
	(To record payroll tax and employee income tax paid in cash)
20	Accounts Payable	500
	Cash		500
	(To record cash paid to suppliers)
21	Interest Expense	3,200
	Discount on Bonds Payable (1,000 ÷ 5)		200
	Cash ($50,000 x 6%)		3,000
	(To record interest expense paid in cash, and discount adjusted with the interest expense)
22	Interest Expense ($92,762 x 7%)	6,493
	Notes Payable	7,745
	Cash		14,238
	(To record principle and interest amount paid in cash)
23	Supplies Expense ($210 + $500 - $190)	520
	Supplies		520
	(To record supplies expense incurred at the end of the accounting year)
24	Uncollectible Accounts Expense (8)	1,993
	Allowance for Doubtful Accounts		1,993
	(To record uncollectible accounts expense incurred at the end of the accounting year)
25	Depreciation Expense (11)	4,275
	Accumulated Depreciation		4,275
	(To record depreciation expense incurred at the end of the accounting year)
26	Warranty Expense	2,520
	Warranty Payable		2,520
	(To record warranty expense paid to customers)
27	Payroll Tax Expense ($21,000 x 4.5%)	945
	Unemployment Tax Payable		945
	(To record unemployment tax  incurred at the end of the accounting year, and adjusted with the payroll tax expense)
28	Payroll Tax Expense	600
	FICA – Social Security Tax Payable (8,000 x 6%)		480
	FICA – Medicare Tax Payable (8,000 x 1.5%)		120
	(To record social and medical payroll tax incurred at the end of the accounting year and adjusted with the payroll tax expense)

Table (1)

Working notes:

Calculate the cost of goods sold for transaction 7b:

Cost of goods sold
Unit (A)	Cost per unit ($) (B)	Total $\left(\text{A×B}\right)$
48	300	$14,400
162	310	$50,220
Total Cost of goods sold		$64,620

Table (2) (1)

Calculate FICA– Social security tax payable for transaction 13:

$\begin{array}{c}\begin{array}{l}\text{FICA- Social security}\\ \text{ tax payable}\end{array})\text{ = Employee salaries }\times \text{Tax rate}\\ \text{= \$96,000}\times \text{6\%}\\ \text{= \$5,760}\end{array}$ (2)

Calculate FICA – Medicare tax payable for transaction 13:

$\begin{array}{c}\begin{array}{l}\text{FICA - Medicare}\\ \text{ tax payable}\end{array})\text{ = Employee salaries }\times \text{Tax rate}\\ \text{= \$96,000}\times 1.5\text{\%}\\ \text{= \$1,440}\end{array}$ (3)

Calculate the amount of dividend declared in transaction 14.

Dividend:	Amount
Declared dividend on preferred stock $\left(\text{\$50 stated value}\times \text{5\% dividend}\times \text{\$1,000 shares outstanding}\right)$	$2,500
Dividend declared on common stock $\left(10,000\text{ shares+5,000 shares = 15,000}\text{shares}\right)$ $\left(15,000\text{ shares}\times \text{\$1 per share}\right)$	$15,000
Total dividends	$17,500

Table (3) (4)

Calculate payroll tax expense for transaction 19:

$\begin{array}{c}\begin{array}{l}\text{Payroll }\\ \text{income}\text{tax expense}\end{array})\text{ = Employee salaries }\times \text{Tax rate}\\ \text{= \$88,000}\times 7.5\text{\%}\\ \text{= \$6,600}\end{array}$ (5)

Calculate FICA – Social security tax payable for transaction 19:

$\begin{array}{c}\begin{array}{l}\text{FICA - Social security}\\ \text{ tax payable}\end{array})\text{ = Employee salaries }\times \text{Tax rate}\\ \text{= \$88,000}\times 6\text{\%}\\ \text{= \$5,280}\end{array}$ (6)

Calculate FICA – Medicare tax payable for transaction 19:

$\begin{array}{c}\begin{array}{l}\text{FICA - Medicare}\\ \text{ tax payable}\end{array})\text{ = Employee salaries }\times \text{Tax rate}\\ \text{= \$88,000}\times 1.5\text{\%}\\ \text{= \$1,320}\end{array}$ (7)

Calculate uncollectible accounts expense for transaction 24:

Particulars	Amount
Alarm sales on account	$132,300
Add: Monitoring service revenue	$67,000
Total credit sales (A)	$199,300
Estimated uncollectible percent (B)	1%
Uncollectible Account expense (A÷B)	$1,993

Table (4) (8)

Calculate the depreciation expense for equipment using straight line method:

$\begin{array}{c}\text{Depreciation expense of equipment}=\frac{\text{Bookvalue-Salvage value}}{\text{Estimated useful life}}\\ =\frac{\$9,000-\$2,000}{5}\\ =\$1,400\end{array}$ (9)

Calculate depreciation expense of building using straight line method:

$\begin{array}{c}\text{Depreciation expense of Building}=\frac{\text{Bookvalue-Salvage value}}{\text{Estimated useful life}}\\ =\frac{\$125,000-\$10,000}{40}\\ =\$2,875\end{array}$ (10)

Calculation of total depreciation expense for transaction 25:

$\begin{array}{c}\begin{array}{l}\text{Total}\text{depreciation}\\ \text{expense}\end{array})\text{=}\left[\left(\begin{array}{l}\text{Depreciation expense}\\ \text{ of equipment}\end{array}\right)\text{ + }\left(\begin{array}{l}\text{Depreciation expense}\\ \text{ of Building}\end{array}\right)\right]\\ \text{=\$1,400+\$2,875}\\ \text{=\$4,275}\end{array}$ (11)

b.

To determine

Post the transactions of T-Accounts for Incorporation PSS.

Explanation of Solution

T-account:

T-account is the form of the ledger account, where the journal entries are posted to this account. It is referred to as the T-account, because the alignment of the components of the account resembles the capital letter ‘T’.

The components of the T-account are as follows:

a)      The title of the account

b)      The left or debit side

c)      The right or credit side

Post the transactions of T-Accounts for Incorporation PSS as follows:

Cash
Bal.	113,718	1	390
3a.	40,000	2	2,995
3b.	52,000	5	58,900
10	55,680	9	90
12	198,000	11	5,250
		13	78,200
		15	1,625
		16	17,500
		17	18,500
		18	6,100
		19	22,400
		20	500
		21	3,000
		22	14,238
Bal.	229,710

Petty Cash
Bal.	100

Accounts Receivable
Bal.	39,390
7a.	132,300	6	3,670
8	67,000	12	198,000
Bal.	37,020

Accounts Receivable Credit Cards
8	55,680	10	55,680
Bal.	-0-

Supplies
Bal.	210
4	500	23	520
Bal.	190

Merchandise Inventory
Bal.	14,400	7b.	64,620
5	58,900
Bal.	8,680

Equipment
Bal.	9,000

Van
Bal.	27,000

Building
Bal.	125,000

Accumulated Depreciation
		Bal.	28,075
		25	4,275
		Bal.	32,350

Land
Bal.	25,000

Accounts Payable
20	500	4	500
		Bal.	-0-

Dividends Payable
16	17,500	14	17,500
		Bal.	-0-

Employee Income Tax Payable
		Bal.	1,000
2	1,000	13	10,600
19	9,200
		Bal.	1,400

FICA - Social Security Tax Payable
		Bal.	840
2	840	13	5,760
19	5,280	28	480
		Bal.	960

FICA - Medical Tax Payable
		Bal.	210
2	210	13	1,440
19	1,320	28	120
		Bal.	240

Sales Tax Payable
		Bal.	390
1	390	7a.	6,300
11	5,250
		Bal.	1,050

Warranty Payable
		Bal.	918
15	1,625	26	2,520
		Bal.	1,813

Unemployment Tax Payable
		Bal.	945
2	945	27	945
		Bal.	945

Notes Payable
		Bal.	92,762
22	7,745
		Bal.	85,017

Bonds Payable
			Bal.		50,000
Discount on Bonds Payable
Bal.		800		21		200
Bal.		600

Retained Earnings
		Bal.	124,816

Preferred Stock
		3b.	50,000
		Bal.	50,000

Common Stock
		Bal.	50,000
		3a.	25,000
		Bal.	75,000

Paid in capital in Excess Common stock
		3a.	15,000
		Bal.	15,000

Paid in capital in Excess Preferred stock
		3b.	2,000
		Bal.	2,000

Dividends
14	17,500
Bal.	17,500

Alarm Sales Revenue
		7a.	126,000
		Bal.	126,000

Monitoring Service Revenue
		8	125,000
		Bal.	125,000

Cost of Goods Sold
7b.	64,620
Bal.	64,620

Advertising Expense
17	18,500
Bal.	18,500

Credit Card Expense
8	2,320
Bal.	2,320

Depreciation Expense
25	4,275
Bal.	4,275

Maintenance Expense
9	75
Bal.	75

Payroll Tax Expense
19.	6,600
27.	945
28.	600
Bal.	8,145

Office Supplies Expense
9.	15
Bal.	15

Salaries Expense
13.	96,000
Bal.	96,000

Supplies Expense
23.	520
Bal.	520

Uncollectible Accounts Expense
24.	1,993
Bal.	1,993

Utilities Expense
18.	6,100
Bal.	6,100

Warranty Expense
26.	2,520
Bal.	2,520

Interest Expense
21.	3,200
22.	6,493
Bal.	9,693

c.

To determine

Prepare trail balance of Incorporation PSS.

Explanation of Solution

Trial balance:

A trial balance is the summary of all the ledger accounts. The trial balance is prepared to check the total balance of the debit column with the total of the balance of the credit column, which must be equal. The trial balance is usually prepared to check accuracy of ledger accounts balances before the preparation of financial statements.

Prepare trial balance of Incorporation PSS as follows:

Incorporation PSS
Trial Balance
December 31, Year 11
Account title	Amount	Amount
Cash	$229,710
Petty Cash	100
Accounts Receivable	37,020
Allowance for Doubtful Accounts		$2,985
Supplies	190
Merchandise Inventory	8,680
Equipment	9,000
Van	27,000
Building	125,000
Accumulated Depreciation		32,350
Land	25,000
Employee Income Tax Payable		1,400
FICA – Social Security Tax Payable		960
FICA – Medicare Tax Payable		240
Sales Tax Payable		1,050
Warranty Payable		1,813
Unemployment Tax Payable		945
Notes Payable		85,017
Bonds Payable		50,000
Discount on Bonds Payable	600
Preferred Stock		50,000
Common Stock		75,000
Paid in capital in Excess of Stated Value Preferred Stock		2,000
Paid in capital in Excess of Par Common Stock		15,000
Retained Earnings		124,816
Dividends	17,500
Alarms Sales Revenue		126,000
Monitoring Service Revenue		125,000
Cost of Goods Sold	64,620
Advertising Expense	18,500
Credit Card Expense	2,320
Depreciation Expense	4,275
Maintenance Expense	75
Payroll Tax Expense	8,145
Office Supplies Expense	15
Salaries Expense	96,000
Supplies Expense	520
Uncollectible Accounts Expense	1,993
Utilities Expense	6,100
Warranty Expense	2,520
Interest Expense	9,693
Totals	$694,576	$694,576

Table (5)

d.

To determine

Prepare an income statement, balance sheet, and statement of cash flows of Incorporation PSS.

Explanation of Solution

Income statement:

Income statement is a financial statement that shows the net income or net loss by deducting the expenses from the revenues.

Prepare the income statement of Incorporation PSS as follows:

Incorporation PSS
Income Statement
December 31, Year 11
Revenues
Monitoring Service Revenue	$125,000
Alarm Sales Revenue	126,000
Less: Cost of Goods Sold		-64,620
Gross Margin		186,380
Less: Operating Expenses
Advertising Expense	$18,500
Credit Card Expense	2,320
Depreciation Expense	4,275
Maintenance Expense	75
Office Supplies Expense	15
Payroll Tax Expense	8,145
Salaries Expense	96,000
Supplies Expense	520
Uncollectible Accounts Expense	1,993
Utilities Expense	6,100
Warranty Expense	2,520
Total Operating Expenses		140,463
Net Operating Income		45,917
Non-Operating Expense:
Interest Expense		-9,693
Net Income		$36,224

Table (6)

Balance Sheet:

Balance Sheet summarizes the assets, the liabilities, and the Shareholder’s equity of a company at a given date. It is also known as the statement of financial status of the business.

Prepare the Balance sheet of Incorporation PSS as follows:

Incorporation PSS
Balance sheet
December 31, Year 11
Assets	Amount	Amount
Cash		$229,710
Petty Cash		100
Accounts Receivable	$37,020
Allowance for Doubtful Accounts	-2,985	34,035
Supplies		190
Merchandise Inventory		8,680
Equipment	9,000
Van	27,000
Building	125,000
Accumulated Depreciation	-32,350	128,650
Land		25,000
Total Assets		$426,365
Liabilities and stockholders' equity	Amount	Amount
Liabilities:
Employee Tax Payable		$1,400
FICA -Social Security Tax Payable		960
FICA - Medicare Tax Payable		240
Sales Tax Payable		1,050
Unemployment Tax Payable		945
Warranty Payable		1,813
Notes Payable		85,017
Bonds Payable	$50,000
Discount on Bonds Payable	-600	49,400
Total Liabilities		$140,825
Stockholders’ Equity:
Preferred Stock, $50 Stated Value, 5% Cumulative, 1,000 shares issued and outstanding	$50,000
Common Stock, $5 par value, 15,000 shares issued and outstanding	75,000
Paid-in Capital in Excess of Stated Value, Preferred	2,000
Pain-in Capital in Excess of Par, Common Stock	15,000
Total Paid-in Capital		142,000
Retained Earnings		143,540
Total Stockholders’ Equity		285,540
Total Liabilities and Stockholders’ Equity		$426,365

Table (7)

Statement of cash flows:

Statement of cash flows reports all the cash transactions which are responsible for inflow and outflow of cash and result of these transactions is reported as ending balance of cash at the end of reported period.

Prepare the statement of cash flows for Incorporation PSS as follows:

Incorporation PSS
Statement of Cash Flows
For the Year Ended December 31, Year 11
Cash Flows From Operating Activities:
Cash Receipts from Customers (12)	$253,680
Cash Payment for Expenses (13)	-189,310
Cash Payment for Sales Tax Payable	-5,640
Cash Payment for Interest	-9,493
Net Cash Flow from Operating Activities		$49,237
Cash Flows From Investing Activities	0	0
Cash Flows From Financing Activities:
Cash Inflow from Stock Issue	$92,000
Cash Payment on Notes Payable	-7,745
Cash Payments for Dividends	-17,500
Net Cash Flow from Financing Activities		66,755
Net Increase in Cash		115,992
Plus: Beginning Cash Balance		113,718
Ending Cash Balance		$229,710

Table (8)

Working notes:

Calculate total cash from customers.

Particulars	Amount
Collection of Accounts Receivable	$198,000
Add: Collection of credit cards	$55,680
Total cash from customers	$253,680

Table (9) (12)

Calculate total cash payment for expenses.

Particulars	Amount
Payment of compensation and related taxes	$103,595
Payment of inventory	$58,900
Payment of accounts payable	$500
Payment of advertising	$18,500
Payment for Utilities expense	$6,100
Payment for warranty expense	$1,625
Payment for Expense from petty cash	$90
Total cash payment for expenses	$189,310

Table (10) (13)

e.

To determine

Prepare journal entry to close the temporary accounts to retained earnings of Incorporation PSS.

Explanation of Solution

Closing entries:

Closing entries are recorded in order to close the temporary accounts such as incomes and expenses by transferring them to the permanent accounts. It is passed at the end of the accounting period, to transfer the final balance.

Prepare to close the temporary accounts to retained earnings of Incorporation PSS as follows:

Date	Account titles and Explanation	Debit	Credit
December 31	Alarm sales revenue	126,000
	Monitoring service revenue	125,000
	Retained earnings		251,000
	(To close all revenue accounts)
December 31	Retained earnings	214,776
	Cost of goods sold		64,620
	Advertising expense		18,500
	Credit card expense		2,320
	Depreciation expense		4,275
	Maintenance expense		75
	Office supplies expense		15
	Payroll tax expense		8,145
	Salaries expense		96,000
	Supplies expense		520
	Uncollectible accounts expense		1,993
	Utilities expense		6,100
	Warranty expense		2,520
	Interest Expense		9,693
	(To close all expenses accounts)
December 31	Retained earnings	$17,500
	Dividends		$17,500
	(To record dividend account)

Table (11)

f.

To determine

Post the closing entries to the T-Accounts and prepare an after closing trail balance of Incorporation PSS.

Explanation of Solution

Post-Closing Trial Balance:

After passing all the journal entries and the closing entries of the permanent accounts and then further posting them to each of the respective accounts, a post-closing trial balance is prepared which consists of a list of all the permanent accounts. A post-closing trial balance serves as an evidence to prove that the balance of the permanent accounts is equal.

Post the closing entries to the T- Accounts of Incorporation PSS as follows:

Prepare post -closing trail balance of Incorporation PSS as follows:

Incorporation PSS
Post-Closing Trial Balance
December 31, Year 11
Account Titles	Debit	Credit
Cash	$229,710
Petty Cash	100
Accounts Receivable	37,020
Allowance for Doubtful Accounts		$2,985
Supplies	190
Merchandise Inventory	8,680
Equipment	9,000
Van	27,000
Building	125,000
Accumulated Depreciation		32,350
Land	25,000
Employee Income Tax Payable		1,400
FICA – Social Security Tax Payable		960
FICA – Medicare Tax Payable		240
Sales Tax Payable		1,050
Warranty Payable		1,813
Unemployment Tax Payable		945
Notes Payable		85,017
Bonds Payable		50,000
Discount on Bonds Payable	600
Preferred Stock		50,000
Common Stock		75,000
Paid-in Capital in Excess of Stated value, Preferred stock		2,000
Paid-in Capital in Excess of Par, Common stock		15,000
Retained Earnings		143,540
Totals	$462,300	$462,300

Table (12)